The federal government has proposed sweeping changes to the way property investors claim depreciation on “previously used” assets within a residential property.
These changes were announced in the May 9 budget and have gone through a consultation period and currently sit before the House of Representatives for finalisation.
It’s complicated, to say the least, so I’ve tried to simplify this proposed legislation into nine key points.
1. If you acquire a second-hand residential property after May 9, 2017 that contains “previously used” depreciating assets, you will no longer be able to claim depreciation on those assets (ovens, blinds etc). Those investors who have exchanged on a property before the budget have not been affected.
2. Acquirers of brand new property will carry on claiming depreciation exactly the way they have done so to date. This is great news for the property industry and the way it should be.
3. The proposed changes relate only to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.
4. The building allowance or claims on the structure of the building have not changed at all. You will still need a depreciation schedule to calculate these deductions. This component typically represents roughly 80%-85% of the construction cost of a property.
5. The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note self-managed super funds do not apply here) or a large unit trust.
6. If you engage a builder to build a house and it remains an investment property, you will still be able to claim depreciation on both the structure and the plant and equipment items.
7. If you renovate a property that is being used as an investment, you will still be able to claim depreciation on it when you have finished the renovations.
8. If you renovate a house while living in it, then sell the property to an investor, the asset will be deemed to have been previously used and the new owner cannot claim depreciation.
9. Perhaps the most interesting point: while investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property. How? Well, in summary, what you would have been able to claim in depreciation under the previous legislation now simply gets taken off the sale price.
Breakdown is still critical
In my view, the legislation could have been a lot worse for both the property industry and the quantity surveying professions.
It will certainly address the integrity measure concern of stopping “refreshed” valuations of plant and equipment by property investors.
It may, however, create a two-tier property market in relation to new and second-hand property.
It will still be just as critical for all property investors to get a breakdown of the building allowance and plant and equipment values so they can:
* Claim the building allowance (where applicable); and
* Reduce the CGT payable when selling the property by deducting the unclaimed plant and equipment allowances.